NFTC President's Speech at "The Coping with U.S. Export Controls" Conference

Date: 12/7/2009

U.S. Export Controls

William A. ReinschPresident, National Foreign Trade Council December 7, 2009

Once again, we find ourselves debating export controls – a familiar situation for all of you, who are practitioners in the field. Export controls are not a new concept. The original Export Administration Act dates from 1949. It was 3 pages long. The last proposed bill I looked at was around 120. In the beginning, control policy was easy. We knew who the enemy was and where he was, and there was an allied consensus on what to do about him. Any technology exported to the USSR was assumed to end up in the Soviet Army, so very little time was spent worrying about end users or end uses. It was simply a matter of deciding whether you wanted them to get it or not. Via COCOM, countries had a veto over other allies’ exports, so the system functioned with a modicum of efficiency.

That was then. This is now. For the first time in more than twenty years, prospects for reform are realistic.

The President personally announced an Administration review, and it appears his officials are taking it seriously, led by the Secretary of Defense, an unusual but welcome development. His staff has designed a process designed to maintain accountability and to produce ongoing results instead of a single report a year later that goes on the shelf with all the other reports that have been done over the years. An interagency group has been formed – people who have been taken off their normal jobs and who are now working through their agenda full time. This agenda is being developed on two levels – incremental changes and major reforms. Changes are put on a schedule with implementation deadlines. While some in the bureaucracy will no doubt do their best to frustrate this effort – after all, not everything has changed – the chances of actually accomplishing something seem better than usual.

In addition, Congress is moving forward on legislation. Congressman Berman, chairman of the House Foreign Affairs Committee, will introduce legislation in late January. I predict it will pass the House in late spring and then die in the Senate. But it will be back in 2011, so the process next year will be important in setting the stage, since the 2011 version will inevitably look very much like the 2010 version. Congress never wastes boilerplate if it can avoid it.

That reform is overdue is one of the biggest understatements of our time. The EAA has not been amended since 1987. There has not been major control list revision since 1994. The always-controversial encryption regulations have now gone ten years without major change. Meanwhile, the world has been changing rapidly.

First, our adversaries are now diffuse and not always nation-states. While there is a degree of allied agreement on rogue states, most of the tough decisions relate to gray area states like China and India that are neither close ally nor determined foe and which are significant economic entities.

Second, the pace of technology change is accelerating, and the line between civilian and military is fast eroding. Moore’s Law remains true; developments in software – the brains behind many of our machines – occur even faster. Products that began as exclusively military items like satellites and night vision equipment have developed significant civilian markets, which we have lost in significant part because our controls fail to take these developments into account.

Third, and perhaps most important, the nature of the global market has changed dramatically. In the good old days, an export was an export. You made it here and shipped it over there in a box. Now we are in the era of global supply chains. Everything is made everywhere and then assembled and shipped from somewhere else. Companies move production around the globe to take advantage of differentials in labor and transportation costs or under pressure from developing country governments to invest there. Research is done around the clock shifting from teams of scientists in one continent to another to take advantage of different time zones. Even more important, the export is often no longer in a box that can easily be examined at the port. It is downloaded from the internet, carried in a flash drive, or embedded in the brains of our traveling scientists and engineers.

From a security point of view, knowledge and technology matter more than the box, because it is the key not only to our national security but also to our economic competitiveness.

It should be clear from all these developments that controlling exports is harder than it ever was, and the burden on our policy makers and enforcement officials much greater. In fact, it forces them to radically rethink our policy.

Bill Perry was the first to really understand the impact of these developments on defense technology, and it is clear Secretary Gates gets it as well. Because of rapid technological change, the military has been shifting to commercial products and away from specially designed items. That puts them in the position of relying on civilian producers whose major markets are civilian and export. Those producers win the competitiveness race by staying ahead of their competition, and they do that by plowing their profits back into R&D on next generation products. America’s future lies in our ability to keep on winning that race.

That only works if they have profits, which require exports. Thus, Perry concluded that exporting was a key element of our ability to make advanced defense technologies and the Pentagon’s ability to buy them.

This was a sea change in thinking that informed the Clinton Administration’s export control policies. Recent thinking on the subject suggests that there are some circumstances where the Pentagon’s needs are so specialized and sophisticated that a return to “milspec” is necessary. In those cases, however, the policy result will be subsidies to military contractors, or even the creation of dedicated, secure, production facilities rather than expanded export controls.

So, where does that leave us? Clearly, the magnitude of changes in the environment mandate equally significant changes in our control policy.

We should begin with a set of principles that will be the foundation for policy changes. Both the Coalition for Security and Competitiveness, a group of companies and associations representing aerospace and high tech companies, and the Export Control Working Group, composed of many of the same companies plus many practitioners and compliance experts who represent a wealth of experience in this field, have developed principles – which are largely similar.

E. Complete the transition to an end user based system by developing procedures for trusted end users and exporters.

These principles, in turn, lead to specific recommendations for change. The two business groups have developed too many for this speech, but I want to provide some highlights.

First, I hope you noticed that something is missing from these principles – reorganization. The business community sees no need to radically rearrange the pieces of the puzzle.

Second, The “higher fences around a smaller number of items” concept needs to be embodied in a workable process for ongoing list review and reduction. We are recommending a “default to decontrol” approach where items must be removed subject to regular timetables if continuation of controls cannot be justified.

Third, that process needs to be based on a constantly updated understanding of technology changes here in the United States and overseas. Consideration of foreign availability needs to be taken seriously; input from the ITACs needs to be enhanced, and automatic decontrol of some items based on their life cycles should be considered.

Fourth, the process for making commodity jurisdiction decisions must be regularized. While the Administration has already made progress on timing, there remain two missing elements to a complete solution – official ratification of the National Security Advisor as the final decision maker on these decisions and agreement on definition of the basic terms that underlie a decision on whether an item is military or not. In keeping with the principle of accountability, in addition to decisions that are brought to the government by industry, the ITAR should be reviewed and items on it not meeting the definition of military use should be removed by a date certain – July 1, 2010 in our recommendation.

Fifth, in order to improve allied cooperation, we need to take the multilateral regimes seriously. Airdropping an Under Secretary into the annual plenary to push our latest proposal simply does not work, as the last two Administrations have learned. Producing multilateral results requires not only careful preparation at all levels, but consistent pressure at all levels. If we care about nonproliferation, then the Secretaries of State, Commerce, and Defense, and other officials involved in nonproliferation should have it on their agendas and mention our proposals at every meeting with their counterparts. Failure to mention something is invariably noticed, with the conclusion that we are not serious about it. Only if we make clear at every level that this is important can we expect results.

Sixth, a number of thoughtful proposals have been made over the past year or two – the intracompany transfer, expansion of the Validated End User program, project licenses for munitions exports, Secretary Locke’s proposal to eliminate licensing requirements for NATO and other allies, proposals for expedited treatment for trusted end users (essentially an expansion of the old SCL), and proposals to return satellites to the CCL. These should all be promptly implemented.

Finally, with respect to enforcement, we recommend regularizing penalties, with clear distinctions in levels based on, among other things, the degree of willfulness in the violation; improving and regularizing the system of Voluntary Self Disclosures, and providing more compliance assistance for small and medium-sized enterprises.

If you read the full set of recommendations from both groups, which will shortly be available, you will see considerably more detail. CSC has nearly 70 proposals; the Export Control Working Group more than 50. Many of these are in the weeds. Most of them can be implemented without legislation, although legislation requiring their implementation would certainly be welcome. Taken together they will realign the export control system with 21st century realities, better protect our security and at the same time enhance America’s ability to compete globally. We look forward to working with the Administration and the Congress to those ends.